Publish in Perspectives - Wednesday, May 8, 2019
Mexico’s ability to issue sovereign debt is negatively affected when part of its budget is used to support state oil company Pemex, experts warn. Here Pemex headquarters in Mexico City. (Photo: Mexican Government).
Will government aid get Mexican oil company Pemex’s finances back on track?
BY LATIN AMERICA ADVISOR
Mexico’s government will offer Pemex a one-year lifeline by using part of its $15.3 billion budget stabilization fund to relieve some of the state oil company’s $107 billion in debt, Finance Minister Carlos Urzúa said April 12.The move follows President Andrés Manuel López Obrador’s announced plan to bolster Pemex’s finances, which includes an injection of $5.2 billion as well as tax breaks, El Universal reported. Is the government approaching Pemex’s debt obligations in the best way possible? What measures should López Obrador implement now to restore the state company’s stability in the long term? To what extent is Pemex’s financial crisis affecting Mexico’s oil and gas sector and the country’s economy more broadly?
Pedro Niembro, senior director at Monarch Global Strategies: For the third time in his four months in office, President López Obrador has announced new measures to help Pemex deal with its financial and production problems. The proposal to use the stabilization fund is like a band-aid on a gunshot wound; it addresses the state-owned productive enterprise’s immediate debt obligations, but it is not a sustainable option for addressing the complex situation that Pemex finds itself in. For Pemex to have any chance of meeting the government’s ambitious production targets and succeed in the long run, it will need to conduct itself like a major oil company by being allowed to make decisions based on what makes the best economic and technical sense. This includes the ability to work with partners who can bring capital and expertise to projects, which can be structured to maintain Mexico’s sovereignty over its natural resources. Even in areas that Pemex is skilled in developing, such as shallow water, the company would benefit from farmouts and joint ventures to manage risk and expand its investment capacity. In addition, more focus needs to be paid to areas that have received little interest from Pemex, such as mature oil fields, where incremental production can be had at comparatively low development costs. More than half of Mexico’s identified potential is undeveloped, and two-thirds of its prospective resources are idle, but practicality must trump ideology to tap this potential. Based on our recent conversations with government officials, we are optimistic that key decision-makers understand Pemex’s need for more flexibility if it is to reach its potential."
Fluvio Ruíz Alarcón, Mexican oil sector analyst: On various occasions, the government has announced several measures to mitigate Pemex’s difficult financial situation. During the approval of the 2019 budget, the Finance Ministry spoke about a capital injection of 25 billion pesos through the Energy Secretariat. Under Pemex’s confiscatory fiscal regime, this amount would be more of a tax refund than a true injection of fresh capital. Let’s not forget that, at least since former President Ernesto Zedillo’s term and until Enrique Peña Nieto’s administration, Pemex’s tax burden exceeded 100 percent of its operating income. That is, since the end of the last century, what today is the state’s producing enterprise has had to borrow just to pay taxes and duties to the Treasury. So far this century, Pemex has had profits after taxes only two years—in 2006 and 2012—despite being one of the most profitable oil companies in the world before taxes. More than conjunctural measures that seem destined to reassure the financial world, what is needed is an in-depth revision of Pemex’s fiscal regime, laid out in the Income Law on Hydrocarbons. This revision, as engineer Cuauhtémoc Cárdenas recently pointed out, must go hand in hand with a profound fiscal reform that not only substitutes part of what Pemex contributes today, but that also provides the Mexican state with the necessary resources to promote sustainable and equitable development.
Raphael Portela, corporate research analyst for Latin America at Wood Mackenzie: Turning around Pemex will not be easy—the outlook is tough on all fronts. Its role as a state producing entity means that it bears a heavy tax burden with limited profitability. The result is a portfolio largely comprised of cash flow negative assets and a company forced to turn to debt markets to fund its operations. Using capital from the stabilization fund to pay down debt can provide short-term relief and allow Pemex to focus on its operations. But more change is needed to ensure Pemex’s sustainability in the longer term. Increased spending in exploration, development drilling and enhanced oil recovery is needed to arrest declining production. Pemex’s fiscal terms must be reviewed, and its tax burden must be reduced to enable the company to be financially self-sustained. The national oil company should also look to streamline its business ventures, focusing only on its best prospects. As a state producing enterprise, Pemex’s fate is intertwined with Mexico’s. Though the government’s dependence on Pemex for fiscal receipts has fallen since the downturn, it still bears responsibility to provide tax revenue. Now and then the Mexican government is forced to step in, absorbing some of the company’s pension debt or providing capital injection to pay for obligations. Mexico’s ability to issue sovereign debt is negatively affected when part of its budget is used to support Pemex. Thus, it is important that the government enact reforms so that the company can go from a burden to a backer.
LATIN AMERICA ENERGY OUTLOOK